Do labor tax rebates facilitate firm growth? An empirical study on French establishments in the manufacturing industry, 2004–2011

Abstract

In order to reduce labor costs and stimulate job creation, many governments implement a large set of devices mainly consisting in reduced rates of social contributions. The evaluation of their effect is still controversial. Unlike previous research, our purpose is to appraise to what extent firm growth reacts to a decrease in the cost of labor per employee. We tackle this question using an unbalanced panel of French establishments operating in the manufacturing industry between 2004 and 2011. We run estimations using a 2-STEP estimator making it possible to estimate the impact of explanatory variables on job creation at any point of the distribution of establishments’ employment growth rate, while also controlling for individual fixed-effects component. Our results show that the effect of the decrease in the labor cost generated by tax rebates mainly benefits fast growing and large establishments. Indeed, the change in the number of employees in other establishments is significantly less affected, even though the effect remains positive, by the reduction in social contributions. This is particularly the case for smaller establishments as well as for those whose growth is stagnant or negative. These results lead us to reconsider the relevance of large-scale policies aiming at reducing labor costs in the same way for all establishments, regardless of their size or financial health.